Two failed Alberta banks shake Canadians

ByFred Langan, Special to The Christian Science MonitorSeptember 4, 1985

Toronto
— Canada has had its first bank failures since 1923, both in the western oil province of Alberta. Early this week the federal government shut down the Canadian Commercial Bank of Edmonton and the Calgary-based Northland Bank, saying they ``were no longer viable.'' A Toronto banker described the failures as ``inevitable.''

Big loans to the energy and real estate sectors led to the collapse of both banks.

Auditors have been appointed to wind up the banks' affairs. Depositors are covered by the Canadian Deposit Insurance Corporation, but only up to $60,000 Canadian ($43,920 US). Ottawa has hinted it will help out those who have larger deposits. ``The government's first priority remains the depositors of the banks,'' says the minister in charge of financial institutions, Barbara McDougall.

Bankers moved quickly to reassure depositors that their money was not in danger. ``Ninety-seven percent of deposit accounts are fully protected by deposit insurance,'' says Robert McIntosh, president of the Canadian Bankers Association. None of the other 12 Canadian banks, or the 57 foreign banks, are in danger, he says.

Still, many depositors are heading for the safety of larger banks. The Canadian Commercial Bank admitted it lost more than $850 million in deposits after problems first surfaced last March.

Although the financial community, centered in Toronto, was not surprised that the two banks went under, it did come as a shock to the average Canadian.

Banking is tightly regulated by the federal government, which decides the type of business banks can do. The Bank Act is reviewed about once every 10 years. Banks were once not allowed to lend mortgage money; that rule changed, and now they dominate the mortgage market.

There are only 14 (soon to be 12) federally chartered banks and 57 foreign banks. The five largest, known as the ``Big Five,'' do more than 84.3 percent of the banking in Canada. Combined assets of the two failed banks were less than 1 percent of the $421 billion in in the Canadian banking system.

The Canadian Commercial Bank (CCB), with assets of $2.8 billion, was 10th largest of the Canadian chartered banks. By comparison, the Royal Bank of Canada, the country's largest, has assets of $93 billion. The CCB had been in trouble for some time. In March it was saved from collapse by a $255 million rescue package put together by the federal and Alberta governments and six chartered banks.

This summer the CCB was closely scrutinized by William Kennett, inspector general of banks.

The Northland Bank, with assets of $1.3 billion, was the 11th largest bank in the country. Ottawa has given the bank a short time to merge with another bank or close.

The last failure was the Home Bank of Canada, 62 years ago. These two failures are expected to bring in tougher federal regulations. Among other measures, it will give Ottawa the power to decide how much real estate held by the banks is worth. Some banks overvalue real estate to make their loan portfolios look better to regulatory authorities.

Both Alberta banks were founded in the mid-1970s when Alberta was in the midst of an oil and real estate boom. That ended in the early 1980s: The world oil glut combined with disastrous federal energy policies to scupper Alberta's economy.

``They were where the action was,'' said Thomas Starkey, bank analyst with the Capital Group in Toronto. When the economy contracted, ``there were too many regional banks in western Canada.''